Cautious tone to US trading on Wednesday, as tech comes under pressure, and UK bonds recover

As we progress through Wednesday, the focus is on two developments: firstly, weaker producer price data in the US, which is adding to evidence that tariff-based inflation is yet to impact the US economy. US producer prices were flat on the month, and final demand prices were lower than expected last month, adding to a downtrend since the start of this year.

Thus, for now, inflation does not seem like it is a hindrance for the Fed to cut interest rates, although headline and core CPI ticked up a notch last month. The focus will be on the labour market for some time to come.

Tech sector weighs on US market as ASML tanks

US stocks have had a muted start to the session, even though inflation pressures have moderated and US bond yields are lower. The focus is on the tech sector, which has gone from hero to zero in 24 hours. News that Nvidia would be allowed to export its H20 chips to China boosted the stock price to a fresh record high on Tuesday, however, the stock price is lower on Wednesday after a weaker than expected earnings report from Dutch firm ASML.

The maker of equipment used for semiconductor production, failed to provide sales guidance for next year, and reduced its forecast for sales for Q3 to EUR 7.4bn – EUR 7.9bn, which is below analyst forecasts. The stock is down a whopping 10% on Wednesday, and it is the weakest stock on the Eurostoxx 50 index, which is lower on the day as a whole.

ASML’s fortunes are closely tied to the overall tech sector in the US, and the semiconductor equipment sector is the weakest performer in the S&P 500 so far on Wednesday.

US bank earnings: investors worried trading bonanza won’t last

The other focus is on another round of bank earnings, this time Goldman Sachs, Bank of America and Morgan Stanley were the highlight. Goldman reported its best ever quarter for trading revenues, as they benefitted from the April volatility. However, the stock price is down 0.8%. This is not because there is something nasty lurking deep in its earnings report, but instead because the share price is already higher by 20% YTD, and since April’s sell off, volatility has been subdued, so mega size trading revenues are unlikely to be repeated in Q3. Morgan Stanley’s share price is down more than 2% today, although it reported earnings that were better than expected, and Bank of America’s share price is also lower by 1.4%, even though it posted better trading and lending revenues. JP Morgan’s share price is also lower for a second day even though it also reported strong earnings last quarter.

We think that the market is making its own mind up about this quarter’s trading revenues and the potential for tariffs to disrupt investment banking income and weigh on the consumer, as reasons for caution when it comes to US banking stocks this week.

UK bond market recovers after CPI wobble  

Overall, the FTSE 100 is continuing to outperform European indices, as its lack of tech exposure protects it from the sell-off in some stocks linked to ASML and semiconductors. Added to this, UK bond yields are giving back earlier gains after the stronger than expected CPI report for June. This is also eroding support for the pound. GBP is still the third best performer in the G10 FX space today, but GBP/USD has fallen back below $1.34, as inflation concerns are eased.